Honda F1 website

JULY 13, 2005

The dangers of short-termism

Flavio Briatore's vision of the future of Formula 1 is interesting. The Renault F1 manager says that the Grand Prix teams, Bernie Ecclestone and the FIA should combine to start a new championship, thus cutting out the three banks which own 75% of Ecclestone's company.

The banks - Bayerische Landesbank, JP Morgan and Lehman Brothers - control the commercial rights to the championship. This came about by accident. The FIA originally sold the rights to the Ecclestone family for 100 years. In a series of complex transactions that followed the rights were transferred to different trust companies which paid for them using a bond issue, in effect a loan secured by the future revenues of the sport. In addition, shares in the company holding the rights were then sold and ultimately ended up in the hands of German media empire Kirch, which had borrowed $1.6bn from the banks to fund its activities.

When Kirch collapsed the banks took control of the shares, but had to fight for control of the business, which was finally achieved earlier this year after a lengthy legal battle with Ecclestone.

However, there exists in the original contract between the FIA and Ecclestone a clause which allows the FIA to cancel the deal if there is a change of control. The details of this are unclear.

Although the theory of Briatore's future structure for F1 is possible, and perhaps even advantageous in the short term, Formula 1 needs to consider the messages that such a deal would send out to the business world. Cutting the banks out of the business would reinforce Formula 1's poor reputation in business circles. This is something which is already holding back the sport because, according to F1 marketeers, companies which would like to be involved in the sport because of its global reach, baulk at the idea because they do not like the image that F1 portrays at the moment.

The alternative is for the teams to purchase the shares from the banks and then put in place a more corporate form of governance and more transparency. This would help to alleviate the F1 image problem and draw in more money. Cutting out the banks would drive that money away.

Buying the business would not be hugely painful as the easiest way to do this would be to raise a new bond issue and use the future revenues of the sport to pay it off. The down-side of this policy is that there would be less money for everyone in the next six-10 years.

Short-termism is not unusual in F1 circles, particularly as many of the major players are no longer young men.